Operational Excellence in Oil and Gas. What is it and How do You Implement

Something is about to become a major business driver and its called Operational Excellence in Oil and Gas. And it’s a real game changer. We do a deep dive plus video.

Why would Operational Excellence in Oil and Gas be important? Ponder this for a second, 69% of Oil and Gas organizations don’t link budget and resource planning to strategy. Can you imagine what would happen if they did?

Well, with an operational excellence program in place, budget, strategy and resources are intrinsically linked – driving world class performance.

Now operational excellence in Oil and Gas is not new, but it is somewhat new to the industry. Operational excellence first came to light in a book authored by Michael Treacy and Fred Weirsema. It was a research book based on what sets market leaders apart from the pack, titled “The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market”. And what their research showed is that market leaders in the business world could excel if they concentrate their efforts on one of three buckets.

The first bucket is product leadership

So companies that excel in product leadership will lead the pack and the company that comes to my mind first is of course Apple, they dominate their niche by being the product leaders. Regardless if you an Apple fan or not, pick up one of their devices, walk into one of their stores or simply look at all the copycats they have spawned and you realize that they are the product leader in their market.

The next is customer intimacy

That’s another bucket that their research determined could help companies come out on top. When I think of customer intimacy, I think of companies like Neiman Marcus or Brooks Brothers. Not only do their front line staff know you by name, but their back office systems are set up to know YOU. Sizes, favorite colors, cuts and styles all tracked so that you are given concierge treatment every time you set foot in one of their locations, anywhere in the world.

And finally, there is operational excellence

FedEx best exemplifies operational excellence. Think about what they’re able to accomplish, over 11 million packages a day delivered to over 220 countries and they do it without a hitch, achieving and on time delivery of 99.45%. Every piece of FedEx’s business has to function together as one cohesive unit to make this possible, from HR to accounts payable, from fleet maintenance to IT, and from supply chain to marketing. All on top of a culture of continuous improvement.

Operational excellence in Oil and Gas was a popular discussion in the 90’s and then it kind of disappeared, because quite frankly profits went up based upon the global price of crude. Well those high crude prices are gone, and are not coming back anytime soon.

We’re in the perfect point in history for operational excellence in Oil and Gas to be a major business driver. (Click to Tweet)

Number 1 Upstream

We’re in a long term low crude price market which means the upstream companies have to wring costs out of their processes. And in some cases a lot of costs. Also they’re doing stuff they’ve never done before, think of unconventionals, deep water, arctic drilling, high pressure high temperature, all which are much costlier and higher risk. The perfect solution? Operational excellence in Oil and Gas.

Number 2 Midstream

Midstream companies have to rethink capacity, routes and opposition. The routes used to be easy to figure out, build pipelines to bring all the oil and gas from the Gulf Coast that was delivered by supertankers, to all of the refineries scattered around the country. Well, that’s almost reversed itself. Now we need to bring oil and gas from the rest of the county due to the shale plays, down to the Gulf Coast for refining. And most of those other refineries scattered around the country are now gone. So not only is the old way of doing business disappearing, but in that process pipeline companies are now blending in the pipe, which is driving the need for storage. On top of all that new and dynamic business (new & dynamic is usually not associated with midstream), the pipeline companies are facing the worse opposition to new construction projects in their history. All a driver for operational excellence.

Number 3 Downstream

Downstream is in a unique position. They’ve being spurred by growth because the cost of their raw feed stock has been cut by 40%. And they are entering new markets like LNG and exports of refined goods. But right smack in the middle of all this growth potential, they’re fighting state and federal policy which has become increasingly more complex and requires much greater attention to detail to implement. Operational excellence in Oil and Gas is the perfect solution.

Number 4 Service

The poor service companies are being hammered. They quite frankly are getting beat up by all of their customers to lower their prices, to do more for less, and get things done quicker. Once again, operational excellence is the key for them to accomplish all of that and still maintain profitability.

Number 5 Talent

And then the entire industry is fighting this thing we call “The Great Crew Change”. This means that a high percentage of senior people with experience are going to retire and at the same time. And it’s going to happen in the next 10 years. And when I say a lot of people, it’s huge. 57% of all mid-level managers and above will be retiring from the oil and gas industry in the next decade. Combine that with an overall shortage of talent in the oil and gas industry, and a severe shortage of craft labor and you get the perfect storm that I think only operational excellence in oil and gas can address.

Now when I say operational excellence in Oil and Gas, a lot of people don’t understand what I mean.

And unfortunately because the oil and gas industry has a ton of engineers, when I say operational excellence most people think process excellence. Two totally different things. You need process excellence to successfully implement an operational excellence program, but you don’t need operational excellence to implement a process excellence program.

Process excellence is a way to wring out inefficiencies in a process. Think Six Sigma, Lean, Agile, Kaizen and Business Process Management. They all address improving the process in some fashion, but they do not look at the entire organization from top to bottom. Nor do they address culture, change management, leadership or continuous improvement.

Operational excellence is exponentially more impactful to an organization. Wikipedia best describes operational excellence as “a philosophy of leadership, teamwork, and problem solving resulting in a continuous improvement throughout the organization by focusing on the needs of the customers, empowering employees, and optimizing existing activities in the process”.

Now operational excellence in oil and gas is in its infancy, but a couple of companies have embraced operational excellence and are on their voyage. If you’re a Chevron fan or if you work at Chevron, you have heard of The Chevron Way. The Chevron Way is “we’ll complete every task, the right way, every time”. That folks is operational excellence.

And big old ship ExxonMobil is out there implementing operational excellence, which is allowing them a return on their operations three or four points higher than their competitors. This means Exxon can go places and either make more money than anybody else, or in places where other companies can’t make money, they can. All because of operational excellence.

When you think of deploying operational excellence in Oil and Gas, it’s really a simple thing to figure out. It’s really just two main parts:

1. Where do you want to take your business?

2. Building and implementing the road map to actually get there.

The first thing I rattled off is where do you want to take your business? That sounds simple, but the answer is actually more strategic than you would think. You need to look at your entire organization, at all the opportunities in the market, your competitors, your company’s strengths and weaknesses, your existing talent pool, leadership and constraints, and then figure out with this identified sets of assets – where do you want to go? What makes the most logical sense as a destination when looking into the future? As Stephen Covey said, begin with the end in mind.

The next part is that once you know where you want to go, how do you build and implement a roadmap to get there? Now this is where it gets much more complex, and coincidently where most companies fail.

The first question you have to answer is, can you picture your mission critical operating processes, like accounts receivable? Can you literally visualize the moment that you send one of your clients a bill, what actually happens on their side? What paper trails, what systems does it have to be key punched in, what processes does that bill go through until you actually get your money? And then once you receive it, what keypunching and paper trails have to take place on your side for you to actually recognize that revenue? What is that process? And that’s one process in a company. Imagine if you take a large enterprise organization in oil and gas, somebody has multiple business units. You can see the complexity of just that one process multiplied by 1,000. But until you can map out and picture your critical operating processes, it will be impossible to look at efficiencies and improvement synergistically.

Once you have that done, then you have to figure out functionally how do you operate? What parts of your business are key and most important which ones are less important so you have an order of progression.

Once you can picture your mission critical operating process and you have an order of progression, the next question you need to answer is, what tasks or workflows need to be tweaked or changed to improve those operating processes? And then once you have that done, you need to implement a system to track and measure the progress (or lack thereof).

And then (and this is part of the process excellence that a lot of people miss out on), you have to drive continuous improvement. So this whole thing that we’re building doesn’t have an end game. It’s continuously being improved and it has to be improved by the people that have their feet on the street, the people that run your day to day business. Which means your leadership team has to build and then support your employees adopting this culture of continuous improvement.

This is not an easy thing to pull off. You’ll hear it a lot in HS&E in oil and gas where people say, well, anybody in the line can pull the trigger. Stop whatever is going on because of a safety risk. The reality is that’s not 100% accurate. What happens is if you’re that guy in the line and you pull that stop lever, you better have a damn good reason why you did or you get your chops busted. That’s not the right way to think about continuous improvement. You need to have the key people in organization being able to stop and reassess the process to see if it can be improved. Now I’m not saying that everybody in the organization can pull the stop lever for any reason. You don’t want a first year engineer right out of school to pull the trigger and stop $85 billion deep-water project. But he may have found something that your senior engineers didn’t see. So what you need is a change matrix in place, so that if something needs to be changed, the right people can verify it’s valid and then you can go ahead and improve the process. Once again, that needs to be an evolution of continuous improvement in the entire organization.

So, once you build and you’re able to deploy that roadmap, now you come to the hard part especially in oil and gas.

How do you change the business culture to ensure success with operational excellence in Oil and Gas? That’s a tough one, but it starts with leadership.

Senior leadership has to buy into this lock, stock, and barrel. If they don’t, this will never be successful. And trust me, it will not happen if it’s an “order from the ivory tower”. It has to be authentic with 100% buy in by the executive team, and eventually every single person in the organization. Situational Leadership fits in perfectly right here.

Once senior leadership has total buy in, corporate communications strategies can be developed to speed up the process for the rest of the organization. FedEx pulled it off, so I see no reason that the Oil & Gas companies cannot do the same.

And then you can start thinking about things like high performance work teams, how do you get your people to do more and be happy to do so? Do more accurate work with less mistakes. That’s performance management and it’s a vital piece that comes in towards the end of your operational excellence journey.

In the very beginning I gave 5 reasons operational excellence in Oil and Gas is going to be a major business driver for the industry. But it’s also the perfect time in history for this to happen. The oil and gas industry is starting to embrace new technologies faster than I’ve ever seen it before. Our industry is facing global competition like its never have, because of the NOCs, the nationalized oil companies, big companies like Shell and Exxon and Chevron are running out of places to drill.

Geopolitics are also playing a major part in this. One of the things I’m most proud of our industry, if you look at the efficiencies as being driven in the frac fields because of low crude prices, they figured it out. The good guys have figured out that they can actually make money at $50 a barrel. Two years ago they were barely making any profits unless oil was above $90 a barrel. Think about how far they had to come in 24 months in terms of operational excellence. We need operational excellence in Oil and Gas to be spread throughout the entire industry. And I think now is the time it’s going to happen.

So what do you think about operational excellence in oil and gas? Leave your comments below.